Not long ago, I told readers about all the oil floating at sea, stored on oil tankers just waiting for higher prices or a buyer.
Well, now some of that of oil is on the move… to China.
The beneficiaries of this development are many of the same shipping companies I mentioned before, particularly any company that is involved in the now-lucrative Asian oil tanker route.
Rates on that route have climbed to nearly $100,000 per day – a level not seen since 2008!
Steadily Stockpiling
Right now oil is at a year-end clearance sales price, and China is taking advantage.
The country tends to think in terms of years, not months, and leaders believe oil prices won’t stay down for long. Thus, it’s using the current dispute between Saudi Arabia and U.S. shale oil producers to fill its strategic petroleum reserve for cheap.
Bloomberg reports that, as of December 12, 2014, there were a record 83 very large crude carriers (VLCCs) filled with oil heading toward Chinese ports.
China also recently revealed that the first phase of its oil inventory buildup is over, with 91 million barrels stored at four different sites.
Now it seems China is buying oil for its so-called “second phase of oil inventory accumulation,” and has already stockpiled an additional 80 million barrels.
The country has stated in the past that its intent is to have a reserve of at least 500 million barrels of oil in place by 2020. For comparison, the United States’ strategic oil reserve has a capacity of 727 million barrels.
China’s Blueprint
This buying isn’t really surprising. The last time China went on such an oil-buying spree was during the 2009 financial crisis, when oil prices were also down in the dumps.
Much of that 91-million-barrel first phase was filled at that time. China is simply following the blueprint that any other commodity buyer would — buy when prices are low.
The result for oil will likely be a bottoming out sooner than most on Wall Street expect. It’s basic economics – higher demand leads to higher prices.
Oil Tanker Rates on the Up
This higher demand for oil is great for the oil tanker companies, which are happily making hay while the sun is shining and the sea is calm.
Current rates are a far cry from a mere six months ago. At that time, many ship owners couldn’t even cover their operating expenses of about $20,000 a day.
Part of the reason for the higher rates is logistics. The route to China is simply longer (tying up ships for longer) from the Middle East and West Africa compared to shipping oil to Europe or the United States.
Nordic American Tankers Limited (NYSE:NAT), which owns 20 Suezmax crude oil tankers, has been a constant traveler of this route lately. Appropriately, its stock is up more than 30% from its October 2014 low.
And let’s not forget that the oil storage trade is still alive and growing, with OPEC refusing to cut production and U.S. oil output on the rise.
Add to that, a limited number of new oil tankers are entering the market in the foreseeable future.
It looks like the good times for oil tanker companies may be here for a while.
And “the chase” continues,
Tim Maverick